European Union Internal Market Commissioner Michel Barnier plans to introduce draft legislation in November to curb the increasing concentration of auditing work among the Big Four firms.
“The auditing market is hyper-concentrated,” he said at a European Commission conference on the future of auditing, according to Reuters. “It is even more so on the most profitable segments of the market, and this inhibits the emergence of new big audit firms.”
Barnier said the E.U. had circulated public consultation on the future of auditing, and it received a massive number of about 700 responses with about 10,000 pages of suggestions. “We received more responses than there are people in this room,” said Barnier.
The heads of four large firms outside the Big Four—BDO, RSM, Grant Thornton, and Mazars—released a joint statement Thursday ahead of the European auditing conference calling for more competition in the market (see Global Audit Firm Heads Call for More Regulation).
Barnier seemed amenable to the idea of creating more competition in the European market for auditing public companies, which is largely dominated by the Big Four.
“We talk about the Big Four, who audit companies such as 99 of the 100 that make up the FTSE 100,” said Barnier. “But we can even talk about the Big Three or Big Two in some cases, I think, as in Germany, where 27 out of 30 companies listed on the DAX30 are audited by two firms, KPMG and PwC.” He wondered whether the failure of a firm could pose a systemic risk.
Barnier raised the question of how to foster the emergence of new players who could compete in the auditing markets. Among the responses to the widely commented upon “green paper” that had been disseminated prior to the conference, Barnier noted that some favored the establishment of limits in terms of market share for auditing larger companies.
Another suggestion was promoting the concept of audit partners, or joint commissions, in which companies could be audited by two different firms, one of which at least would not be a member of the Big Four. He noted that this could be an effective way to give firms the opportunity to grow by gaining more experience and becoming known in markets that are now closed.
Another way to open the audit market, he noted, would be to create a "European passport,” a principle that already applies to banks, insurers, investment firms and financial intermediaries, he noted.
Barnier said that Europe must promote the growth of its small and midsized enterprises, and the smaller fims that tend to audit them. There would be less of a strict application of rules for the smaller firms. “It is these same firms who audit the SMEs, which are the lifeblood of our economy in Europe,” he said. “I am very committed to making life easier for these companies as much as possible by reducing regulatory constraints.”
Barnier emphasized the need to strengthen international cooperation in auditing. “It is important to have common rules that promote audit quality,” he said, citing the work of the International Auditing and Assurance Standards Board and the global application of the International Standards on Auditing. However, he was uncertain as to whether the ISA standards should be made mandatory in the E.U., as that could put additional strain on small and midsized businesses and the firms that audit them. .
“I would therefore like to reflect on how we can better tailor those rules to the needs of firms and industry,” he said. “But it is clear that any solution in this area must be global. We will only move forward if there is more cooperation among regulators, and if our international partners are fully committed to the implementation of these rules.” He believes that the issues of cooperation and convergence in the audit industry might be something for the G-20 economic leaders to pursue.
All in all, Barnier made it clear that he believes it is not a good idea to maintain the present situation with a small number of auditing firms dominating the European market. “After consultation, it is clear that the status quo is not an option for the world of auditing,” he said. “It's not about change for change’s sake, but to respond to real needs that we can no longer ignore.” He said he planned to pursue further consultations on the matter.
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